I spend a lot of my time talking to investors and financial advisors. And whether I’m giving an overview of BlackRock’s Strategic Income Opportunities Fund or offering my thoughts about the economy and bond markets, one question always seems to come up: What, exactly, is “unconstrained” investing? And is it something investors should consider?

There’s been more and more money pouring into unconstrained fixed income funds as many look for new ways to gain income amid low yields. There’s also been a lot of media coverage about this investment approach, so it’s not surprising that questions about unconstrained investing are popping with some degree of regularity.

Many market watchers seem to feel that unconstrained investing is a high-risk, undisciplined way to invest. But I would argue just the opposite—to me, unconstrained investing is a way to manage volatility while seeking out a variety of sources of return. Here’s how I answer the questions I get about this approach.

What Is Unconstrained Investing?

So let’s start with answering that first question. Simply put, unconstrained investing is a flexible, adaptable, go-anywhere approach that looks for opportunities across a wide set of asset classes and markets without the limitations imposed by a broad market benchmark.

Most traditional fixed income funds are managed against a specific market benchmark (such as the Barclays U.S. Aggregate Bond Index). In practice, that means the portfolio managers are tied to creating portfolios that look a lot like the index, with some narrow degree of flexibility. In this particular example, given that the Barclays U.S. Aggregate Bond Index is heavily comprised of Treasuries and other government-related debt, and given that these are the types of bonds most vulnerable to potential increases in interest rates, these traditional bond portfolios may be taking on more risk than many realize. Here’s more detail on this point.

In contrast, unconstrained funds are not tied to a specific index. That means they can access a wider and more diverse set of opportunities. In my mind, this means managers of unconstrained funds can work to avoid the risks they want to avoid and take on the risks that make the most sense for the investor. Additionally, unconstrained funds tend to be outcome oriented. In other words, many unconstrained funds are lined up with a specific investment objective (such as maximizing an income stream) rather than working to beat a benchmark. This feature makes them well suited for those investors focused on achieving that same outcome. Investors must also be aware that flexible strategies invest in a wider variety of bonds including, but not limited to high yield and emerging markets, and are more susceptible to credit risk.

What It’s Not

Some of the confusion about unconstrained investing comes about from the fact that these sorts of funds are not managed against a benchmark. But not being benchmark constrained doesn’t mean that these funds don’t have risk controls or guardrails.

Unconstrained investing is not about being undisciplined, nor is it about ignoring the risk/return tradeoff. In fact, I would argue the opposite is true. By carefully choosing which risks to take and which risks to avoid, we can focus on finding what we believe is the best source of risk-adjusted return, regardless of how a benchmark is constructed.

So How Does It Actually Work?

So what does unconstrained investing look like in practice? The easiest way I can answer that is by looking at how we adjust our own unconstrained fixed income fund (BlackRock’s Strategic Income Opportunities Fund) over time.

In an environment, like the one we’re in today, where interest rate policy is evolving differently around the globe, we would seek to minimize interest rate risk. We could do this by decreasing our allocation to interest-rate-sensitive bonds in regions where rates are normalizing faster, and by increasing our interest-rate-sensitive allocation in areas where monetary policy is staying easy or getting easier. Meanwhile, if we’re in an environment where rates are rising across the board, we could lower our overall allocation to interest-rate-sensitive bonds. Or if we think economic conditions are getting better, we could up our exposure to credit-sensitive bonds.

The point is, we have the flexibility we need to make these sorts of moves without having to focus on how far we might be deviating from a specific market benchmark. Looking for more specifics? I’d invite you to check out this interactive chart, which shows exactly how we’ve tweaked the fund’s duration and asset allocation over the past several years in response to changing market conditions:


Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, is Co-head of Americas Fixed Income, and is a regular contributor to The Blog.

Bonds and bond funds will decrease in value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies.

Investopedia and BlackRock have or may have had an advertising relationship, either directly or indirectly. This post is not paid for or sponsored by BlackRock, and is separate from any advertising partnership that may exist between the companies. The views reflected within are solely those of BlackRock and their Authors.

Related Articles
  1. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  2. Investing

    The Pros and Cons of High-Yield Bonds

    Junk bonds are more volatile than investment-grade bonds but may provide significant advantages when analyzed in-depth.
  3. Financial Advisors

    Ditching High-Yield Bonds for Plain Vanilla Ones

    In a low-rate environment, it's tempting to go for higher yield bonds. However, you might be better off sticking with the plain vanilla ones.
  4. Bonds & Fixed Income

    What is an Indenture?

    An indenture is a legal and binding contract between a bond issuer and the bondholders.
  5. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  6. Bonds & Fixed Income

    Credit Default Swaps: An Introduction

    This derivative can help manage portfolio risk, but it isn't a simple vehicle.
  7. Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

    Don't be fooled by the name - junk bonds may be for you if you know how to analyze them.
  8. Investing

    Understanding High Yield Fund Performance

    For exchange traded fund, not all high-yield ETFs are the same. So, we take a look at one high yield investment in particular to set the stage for you.
  9. Investing

    Is US Inflation Too Low?

    One reason the Fed has delayed its first rate hike: U.S. inflation has been persistently running below the stated 2 % level the central bank seeks to target.
  10. Savings

    Being too Safe with Your Money Could Turn Risky

    Find out why playing it safe with your retirement savings can actually turn risky, including the basics of inflation risk and interest rate risk.
  1. What are the maximum Social Security disability benefits?

    The average Social Security disability benefit amount for a recipient of Social Security Disability Insurance (SSDI) in 2 ... Read Full Answer >>
  2. How do I calculate the future value of an annuity?

    When planning for retirement, it is important to have a good idea of how much income you can rely on each year. There are ... Read Full Answer >>
  3. Do hedge funds invest in bonds?

    Hedge funds have the freedom to deploy their capital in virtually any manner. They can use leverage, invest in non-publicly ... Read Full Answer >>
  4. Have hedge funds eroded market opportunities?

    Hedge funds have not eroded market opportunities for longer-term investors. Many investors incorrectly assume they cannot ... Read Full Answer >>
  5. Do mutual funds pay dividends or interest?

    Depending on the type of investments included in the portfolio, mutual funds may pay dividends, interest, or both. Types ... Read Full Answer >>
  6. Can mutual funds only hold bonds?

    While some mutual funds include bonds in addition to other asset types, certain funds, aptly named bond funds, hold only ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center